Should You Stay Away From Jim Cramer?

March 26, 2008

By ALICE GOMSTYN ABC NEWS Business Unit

He might be the most celebrated stock picker on TV, but many say Jim Cramer got it wrong and some have renewed an older criticism of the television host: Small investors who follow Cramer stand to lose big.

Cramer is the host of "Mad Money," a weekday program on CNBC on which the animated hedge fund millionaire darts around his set, shouting investment advice and punctuating market talk with many a jubilant "Boo-yah."

Since the shocking collapse of investment bank Bear Stearns, Cramer has taken serious heat for comments he made on his March 11 show.

He told viewers: "Don't move your money from Bear! That's just being silly! Don't be silly!"

Cramer and CNBC have defended his statements, arguing that Cramer's assertions on the bank were in reference to a viewer's question on Bear Stearns' liquidity, not its stock prices.

CNBC spokesman Brian Steel said that on the Friday before Bear's meltdown, Cramer presciently called the bank's stock worthless. Cramer could not be reached for direct comment.

"I think that anybody who has a fundamental understanding about capital markets knows the distinction between [a] question about stocks and liquidity," Steel said.

Whether Cramer's viewers understood that the host and former hedge fund manager was not talking about Bear Stearns' stocks is unclear. Meanwhile CNBC's defense of Cramer has not insulated its heavily promoted star.

Fake News, Real News Pile On

In recent days, finance and news blogs have blasted Cramer, and Comedy Central's news parody "The Daily Show" gave him a not-so-gentle ribbing: "I love the way Jim Cramer breaks down really complex financial issues into ones that are wrong," host Jon Stewart said.

Upping the snark factor was Fox Business News, which took out half-page ads Monday in The New York Times and The Wall Street Journal, comparing Cramer's words to some of the most infamous quotes of the last century, including Neville Chamberlain's famous statement after conceding Czechoslovakia to Adolf Hitler's Germany: "I believe it is peace for our time."

Snark aside, concerns raised by industry veterans and investment advisers take the long view of Cramer and his impact on small investors.

"He kind of puts himself forward as the champion of retail investors, but had they listened to him on the [Bear Stearns] call, they would have lost a lot of money," said Roger Ehrenberg, the managing partner of IA Capital Partners in New York. "He empowers people to feel confident about buying and selling individual stocks, when in fact most people are ill-qualified to invest in that manner."

Ehrenberg and others say that Cramer's show may encourage small investors to make frequent trades when it is really in their interest to invest in mutual funds and hold them for long periods of time.

"On 'Mad Money,' Cramer promotes a mindless short-term approach to markets by encouraging frenetic trading of individual stocks," David F. Swensen, who supervises the $20 billion endowment of Yale University, said in an e-mail to ABC News. "Such a high-cost, tax-inefficient strategy almost guarantees failure."

CNBC's Steel said Cramer sees success. He said that a charitable trust Cramer runs performed better than the S&P 500 Index last year.